Right, we absolutely need to base economic policy on an unproven theory you found on the internet. Did you notice that there isn’t a single historical example in that article?
Since this is a real-estate board, here’s a question about your deflation solution:
What happens when millions of homeowners see the value of their home decline below the outstanding balance on their mortgage?
What happens when property tax revenue decreases?
Oh wait…I just watched this show…[/quote]
1.) Investopedia doesn’t write articles. It’s an encyclopedic source of information that is geared toward economic terms, definitions and explanations.
2.) Once again, you might indulge in a little bit of “finding information on the internet” yourself before embarrassing yourself when you post comments that show a clear lack of understanding about a particular subject.
It’s odd that someone who claims to have advanced degree(s) from top universities wouldn’t know how to research something, even if that means doing a cursory search on the internet.
So, here’s a new bit of information for you, Mr. Finance Expert:
“Downward nominal wage rigidities, wage growth, and unemployment
Downward nominal wage rigidities are a well-documented feature of the U.S. labor market (see, for example, Akerlof, Dickens, and Perry 1996 and Card and Hyslop 1996). With that in mind, Daly and Hobijn (2014) introduce a model to illustrate how such rigidities can affect the relationship between unemployment and wage growth. Downward rigidities prevent businesses from reducing wages as much as they would like following a negative shock to the economy.”
[FYI, all economic theories are theories, and many of these theories have never been proven in real life. That being said, the “stickiness of wages” during downturns is a well-known and well-documented occurrence. I’ll leave it up to you to read the original studies quoted here…or, does the Federal Reserve Bank not count as an acceptable source of information for you, either?]
3.) What happens when the value of people’s homes drops below what they owe? In a normal market where mortgages were properly underwritten, and where people put 20% down on a property, not much happens at all. The only thing that changes is the number of short sales (they obviously increase), where people sell their home for less than they owe, for those who need to sell their homes during the downturn.
Most people who purchase a home with the expectation of living in it (as opposed to speculating on its value) will not change their behavior much at all if they don’t intend to sell it.
The reason that so many people walked away from their homes after the bubble popped was because they had stretched their finances so thinly, so they were relying on non-stop appreciation which enabled them to use their homes as low-interest-rate credit cards by cash-out refinancing and HELOC’ing their homes every year. They would then use that money to pay for basic necessities, including their mortgage payments.
No appreciation >>> no increasing their credit limits >>> no mortgage payments. It was easy to forecast what was going to happen, even when all the “experts” were saying that people wouldn’t walk away from their homes and mortgage obligations.
